Economic Theory Seminar Series: Competitive Personalized Pricing with Sophisticated Consumers

Zhijun Chen | Monash University

Personalized pricing, a practice of price discrimination among targeted consumers, becomes increasingly popular due to the unprecedented availability of vast individual-level data. This paper studies personalized pricing in competitive markets when consumers are sophisticated to overcome hurdles for price discrimination. Sophisticated consumers can access to the low price for new customers, which discourages competing firms from serving new customers and/or poaching the rival's customers. Using a simple Hotelling setting, we show that, when consumers are sophisticated, competing firms can earn the profit of Perfect Price Discrimination (PPD) and extract full consumer surplus if firms have sufficiently large and non-overlapping target zones. Consumers are strictly worse-off under competitive personalized pricing, a result in contrast with the common view in the literature. Our findings also appeal for the regulation of internet privacy.